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Airline Stocks Sink on Oil Price Spike Following Iraq Attack

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The performance of airline stocks depends to a great extent on crude oil prices. As a matter of fact, airlines have an inverse relationship with oil prices (lower fuel prices bode well for the industry). This is because fuel expenses comprise a major chunk of total airline expenditures.

While market experts forecast a stable outlook for oil prices in 2020, the rising Middle East tensions might turn things awry soon. Following the U.S. drone strike near the Baghdad international airport that killed Iran’s top commander General Qassim Soleimani, oil prices jumped more than 3%. Brent crude is said to have touched $68.6 a barrel on Friday, marking its highest level since the drone attack on Saudi Arabian oil field in September 2019.

This sudden oil price leap coupled with speculations of a further rise in the price of this commodity in case of an Iranian retaliation, pulled down the airline stocks. American Airlines Group (AAL - Free Report) , United Airlines Holdings (UAL - Free Report) , Delta Air Lines (DAL - Free Report) , Alaska Air Group (ALK - Free Report) , JetBlue Airways Corporation (JBLU - Free Report) and Spirit Airlines (SAVE - Free Report) saw their shares sinking 4.9%, 2.1%, 1.7%, 1.8%, 1.7% and 2%, respectively, at the close of business on Jan 3. Consequently, the NYSE Arca Airline Index slid 1.9% at the close of Friday’s trading session.

While Delta and Spirit carry a Zacks Rank #2 (Buy), United Airlines, Alaska Air Group and JetBlue carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, American Airlines carries a Zacks Rank #4 (Sell).

Long-Term Impact Unlikely

During September’s drone strikes on crude oil facilities in Saudi Arabia, there was an initial spike in oil prices by over 14%. However, prices quickly stabilized owing to the restoration of crude production capabilities.

Despite Iran’s warning of “severe retaliation”, some market watchers believe that the Iranian retaliation (if at all it occurs) might just have a short-term impact on crude oil prices and thereby on airlines. Based on past events, Tortoise Capital’s portfolio manager Rob Thummel feels that the political turmoil “would likely only be temporary” and hence might not affect oil prices much.

Boeing 737 MAX-Related Woes Linger

Besides the oil price uncertainty, the Boeing 737 MAX-related woes continue with no clarity in sight regarding the aircraft’s return to service. The Boeing 737 MAX jets have been grounded since last March following two fatal air crashes in different parts of the world over a span of only five months, apparently due to software malfunctioning. The grounding of this aircraft resulted in reduced capacity and escalation of non-fuel unit costs, thereby limiting bottom-line growth of carriers with such jets in their fleet.

For instance, Southwest Airlines with the largest (34) exposure to the MAX jets among the U.S. carriers saw its operating income decline by $435 million in the first nine months of 2019. Additionally, American Airlines (with 24 MAX aircraft) expects its capacity to have increased only about 1% in 2019 (over 2018 levels) compared with its previous projection of a rise of 2-3%. This contraction in capacity is primarily due to the grounding of the company’s 737 MAX aircraft. Moreover, the carrier anticipates its full-year pre-tax income to have been hurt by roughly $540 million on account of grounding issues.

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